If you read the trader interviews in the Market Wizard books, all of these billionaire/multi-millionaire traders emphasize the importance of managing risk. If they had a Holy Grail system, risk management would be largely irrelevant.
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Here are three reasons why you’ll have better luck being the first man (or woman) to reach the sun than finding a “holy grail” for forex trading:
1. No one can prepare for ALL market uncertainties.
One of the advantages of trading forex is that the bajillion factors that move currencies make it hard for any individual or group to influence price action for prolonged periods of time. Unfortunately, this also makes it difficult for traders to predict future price action.
Unless you gain a superpower that lets you know what central bankers and economic influencers will say ahead of time; warn you of the next natural disasters and terrorist attack, or prepare for similar circumstances, then you’ll unlikely to find a holy grail anytime soon.
2. Humans move the market
At least for now. Though Robopip and mechanical trading systems in general have gained popularity over the last few years, humans still control the ebbs and flows of the forex market. Human behavior is one of the reasons why we still see trading opportunities, where price doesn’t reflect its value based on available data and existing market themes.
Mike may be interpreting an economic release in a different light and place orders in the opposite direction of Harvey’s. Elliot, who handles a corporate account, may hold on to a losing position rather than close a losing trade. Multiply these everyday scenarios and we get an unpredictable mix of potential price reaction.
3. No strategy is profitable in ALL types of trading conditions
Those who have spent some time with markets know that, like human behavior, there are patterns that tend to repeat themselves on the charts.
EUR/USD could react to stochastic signals and trade on a 100-pip range for days. Likewise, AUD/JPY could be counted on to bounce lower from a 100 SMA retest.
But what if the pattern ends and price transitions into another pattern? For example, EUR/USD could suddenly break from its range and keep stochastic in the overbought area as the pair switches to a trending setting. Stochastic, which had been reliable, is now useless while trending strategies start to make sense again.
Most trading systems only work well until price shifts into another pattern. The continuous shifts in trading conditions and the unpredictable timing of when they occur make it difficult for traditional technical tools to be reliable all day every day. It takes discretion to spot shifts in patterns and to identify which strategies would yield profits.
Just because there’s no holy grail doesn’t mean you can’t be profitable trading forex. Many traders are already trading full-time and even more are content to be consistently profitable. The key is to control your risk. Since you can’t eliminate it, the least you can do is to control it with proper risk management.
veteran trader first focus on risk management,money next come
“You should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities.” – Paul Tudor Jones
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – George Soros
“Frankly, I don’t see markets; I see risks, rewards, and money.” – Larry Hite
“It is essential to wait for trades with a good risk / reward ratio. Patience is a virtue for a trader.” – Alexander Elder
“Paul Tudor Jones [had a principle he used to use] called 5:1. […] he knows he’s going to be wrong [sometimes] so if he loses a dollar and has to spend another dollar, spending two to make five, he’s still up $3. He can be wrong four out of five times and still be in great shape.” – Anthony Robbins on Paul Tudor Jones
“The most important thing is money management, money management, money management. Anybody who is successful will tell you the same thing.” – Marty Schwartz
Traders are constantly searching for the indicator & Expert Advisors that will make them rich, but trader Rob Hoffman warns that indicators & Expert Advisors work differently for every trader and mustn’t be used as a crutch.
Traders always seem to be looking for the next hot indicator & Expert Advisors or the indicator & Expert Advisors that’s going to make them millions of dollars and be able to use that forever and ever on any kind of market, but is that the reality?
Our guest today is Rob Hoffman; he’s here to talk about that. Rob, should I rely or go out and try to find the best indicator to use and continually use that? What’s the best way to deal with so many that are out there?
You know Tim, I went through that for years, looking for the magic bullet, the secret, the “HolyGrail.” While I found a lot of indicators that seemed to work a lot of the time, what I really found in the end is that it’s not just indicators, because even if you have a great indicator, what do you do with that indicator?
When it says buy, do you go ahead and delay your buying decision? Do you go ahead and buy in front of your buying decision, so do you front-run the indicator? How do you start handling it emotionally when the signal is about to fire off or does fire off?
Even if you have a great indicator, what I find often in the real world is what works really well for trader number one doesn’t necessarily work well for trader number two.
A lot of that is personality, personality style, and also kind of their mindset, their emotional state.
What I believe is…I’m a firm believer that the “HolyGrail,” in many ways, is within a trader, their mindset.
I often talk about different mindsets that I believe to be adverse for most traders.
What happens is—and I had recently a real life example of another reason not to go ahead and rely strictly on indicators, but focus on price action, support/resistance, and mindset as well—I recently had a situation where a permissioning server that I was trading through went ahead and went down, so all the indicators that I had that were permissioned on that server all went down, so effectively I had support/resistance levels, price action, and a volume indicator, basically, a volume indication.
So I was back to the basics. No fancy indicators, no custom indicators, no proprietary “Holy Grails,” just Rob Hoffman’s support/resistance and price action. That trade worked out very well for me.
The point is, though, regardless of how it worked out, I had to get back to the basics, and if I was really only focused on indicator trading, I would have been paralyzed. What do I do, my indicators aren’t there, I guess I’m going to have to shut down the computer for the day?
Also, indicators are very well known or giving false signals. Even the best indicators will occasionally give you a false signal.
How do you, or how in tune are you with the market to tell you at a particular time, you know, the indicator says buy or sell, but something just doesn’t seem right here. I’m not feeling it in the price action; something’s off, something’s not right. I think I’m going to abstain from taking this particular trade, so still being in tune with price action, volumes, support/resistance, I think, are really important.
You want to be able to trade whether or not you have access to a specific tool. Because in the end at some point you’re going to have just price to watch and maybe volume and the support and resistance levels, so you don’t want to use it as a crutch, I guess.
Exactly, I’m very firm about that, I don’t want to use it as a crutch. It’s a support decision tool when I have it, but in the end, there’s more than life in this search for the “HolyGrail” or the Holy indicator, that’s right.
Ask any quant on Wall Street (the super geeky math and physics PhDs who create complex algorithmic trading strategies) why there is no “holy grail” indicator, method, or system to pull profits 100% of the time.
You will probably be given two reasons:
1. You can’t predict the future.
Is there any way to know what a central bank head will say during a speech?
Or maybe what a super famous investor or hedge fund manager says during a random TV interview?
Do you know when the next terrorist attack will hit and cause risk aversion?
How about a natural disaster like an earthquake or tsunami?
The list of unforeseen market moving catalysts is infinite and when they happen, they can rock the markets and your forex trading system.
Understand that this is part of trading and the best you can do is be prepared to limit your losses if they occur.
Be ready to have your world rocked. And we don’t mean that in the way you think it means.
2. Data doesn’t move the market. Humans do.
There will be times when data or market themes do not mesh with price action.
Why is that?
Maybe the outcome was priced in ahead of time? Maybe forex traders weren’t focused on the data that was released?
Maybe there was an institution covering a huge position that was on the wrong side of the market?
Would all players in the market react to an unforeseen catalyst the same way?
Whatever the price behavior may be, the decisions that lead a trader to take action aren’t always logical or congruent to the information out there.
When you multiply this by the millions of players with different goals/strategies and different sized trading accounts, it becomes impossible to tell where the overall market will go every single time.
You can’t quantify or calculate human behavior and unknown future events into an elegant mathematical equation to completely get rid of risk.
There will always be some level of uncertainty and there will be times when you will be on the wrong side of a currency market move.
Actually….there will be MANY times when you will be on the wrong side of a currency market move.
Perfectionists should probably stay away.
For those of you who always feel the need to be correct, we must warn you now…
Nobody can perfectly predict the market every single time.
All hope is not lost though if you decide to stubbornly not listen and continue your search for the Holy Grail.
Rumor has it that if you can find a pink unicorn standing under a rainbow, you will come across an invisible leprechaun who will give you the Holy Grail. Good luck